The bubbles, panics and rescues, and what each one teaches.
A bank fails when its liabilities come due faster than its assets, which can happen to a solvent bank.
Any banking interview question on runs, deposit insurance, liquidity rules or March 2023.
From It's a Wonderful Life · 1946
Check all three legs, marketability, cheap money and a population buying for resale, before calling something a bubble.
Answering whether a current market is a bubble, or explaining why some overvalued assets never become one.
From Boom and Bust · William Quinn and John D. Turner
Ask what a rating assumes about defaults happening together before trusting what it says about the pool.
Any question about 2008, about structured credit, or about why a highly rated instrument lost most of its value.
From The Big Short · 2015
Ask what period a model was fitted to, and whether that period contained the event you are worried about.
Any risk model, stress test or structured product that reports a probability of loss.
From Berkshire Hathaway's 2008 letter to shareholders · Warren Buffett
The 2023 runs redistributed deposits towards the largest banks and exposed a pricing gap that already existed; they did not reprice the system.
Any question about the 2023 banking crisis, deposit flight or the funding advantage of the largest banks.
From Deposits and the March 2023 Banking Crisis–A Retrospective · Stephan Luck and Matthew Plosser, Federal Reserve Bank of New York (Liberty Street Economics)
Ask where a market is in the sequence rather than whether it is a bubble; the stages are more recognisable than the verdict.
Any market history question, any debate about whether a current theme is overdone, and macro interviews.
From Manias, Panics, and Crashes · Charles P. Kindleberger
A rescue that swaps assets at fair value changes nothing; only new capital changes a bank's solvency.
Banking crises, bailout design, and the interview question of what a capital injection does that asset purchases do not.
From John Hussman's October 2008 market comment on recapitalising the banks · John Hussman
Lending cures illiquidity; only capital cures insolvency. Decide which problem you have before choosing the remedy.
Questions about why Lehman was allowed to fail and AIG was not, about central bank lending, or about any distressed situation.
From Too Big to Fail · 2011
Follow the incentives through every institution in the chain, including the ones that were supposed to be the check.
When a conversation about a failure stops at the most visible actor, and when assessing any system where the checker is paid by the checked.
From Inside Job · 2010
The fair test of a decision is the information available when it was made; hindsight is a different exam.
Discussing the Lehman decision, or any post-mortem where later knowledge is contaminating the judgement.
From Inside the Meltdown · 2009
State the liquidity first, because the argument that prices overshoot value is only available to those who can wait.
Any crisis communication, any question about buying in a crash, and infrastructure or real asset valuation.
From Bruce Flatt's March 2020 update to Brookfield shareholders · Bruce Flatt
A firm that did what the rules allowed and lost has not been excused by the rules; management chose the position.
Banking interviews, risk culture questions, and any post-mortem that reaches for the regulator as the explanation.
From JPMorgan Chase letter to shareholders, 2008 · Jamie Dimon
The price of risk tracks the mood, so the useful time to buy is when the mood is worst, and the dangerous time is when it is best.
Any question about market timing, contrarian investing or what to do in a crisis.
From Berkshire Hathaway's 2008 letter to shareholders · Warren Buffett